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Turkey
Introduction
Specific transfer pricing rules are valid in Turkey as of the beginning of 1 January 2007
under Article 13 of the Corporate Income Tax Law (the CITL) No. 5520 with the title
‘Disguised Profit Distribution through Transfer Pricing’.
The regulations under Article 13 follow the arm’s-length principle, established by the
Organisation for Economic Co-operation and Development Transfer Pricing Guidelines
for Multinational Enterprises and Tax Administrations (OECD Guidelines), and are
applicable to all financial, economic, commercial transactions and employment
relations between related parties. Details on the application of Article 13 are provided
in a communiqué regarding disguised profit distribution through transfer pricing.
Statutory rules
The legal framework that defines the current Turkish TP implementation methodology
is included under the CITL and the related communiqué(s).
The Turkish TP legislation is part of the Turkish CITL. The arm’s-length principle,
which is defined in line with OECD Guidelines and Article 9 of the OECD Model
Tax Convention, is enacted in Article 13 of the CITL along with a detailed definition
of related parties, as well as the introduction of methods to be applied in the
determination of the arm’s-length price. According to the law, related parties must set
the transfer prices for the purchase and sales of goods and services as they would have
been agreed between unrelated parties.
A comprehensive definition of what constitutes a related party is found in Article 13
of the CITL. Related party definition of the Turkish Transfer Pricing regulations is very
broad and it includes direct or indirect involvement in the management or control
in addition to the existence of shareholder/ownership relationship. In addition to
transactions with foreign group companies, it also includes transactions with entities
that are based in tax havens or in jurisdictions that are considered to be harmful tax
regimes by the Turkish government.
For the purposes of the CITL, the term ‘corporation’ covers:
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capital stock companies
cooperatives
public economic enterprises
economic enterprises of associations or foundations, and
joint ventures.
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Within this framework, the concept of ‘related party’ is broadly defined under Article
13 of the CITL No. 5520 as follows:
• Shareholders of the corporation (without any threshold).
• Legal entities or individuals related to the corporation or its shareholders.
• Legal entities or individuals which control the corporation directly or indirectly in
terms of management, supervision or capital.
• Legal entities or individuals which are controlled by the corporation directly or
indirectly in terms of management, supervision or capital.
• Spouses of shareholders of the corporation.
• Ascendants and descendants of shareholders or their spouses.
• Persons who are linked to shareholders or their spouses up to third degree by direct
blood relationship or marriage.
Moreover, by taking into account whether the taxation capacity of the source country
(the tax burden on corporate income earned in the source country to be measured by
taking into account all taxes that are similar to personal and corporate income taxes)
is the same with that of Turkey and the issue of exchange of information, transactions
made with persons located in regions or countries to be announced by Council of
Ministers will be deemed as if they were made with related parties.
The Transfer Pricing rules define certain methods for the determination of arm’s-length
transfer prices. The methods adopted are comprehensively explained by the OECD
Guidelines and are as follows:
• Comparable uncontrolled price method.
• Cost plus method.
• Resale price method.
The law states that if the above-mentioned methods cannot be used by the company
for certain situations, the taxpayer will be free to adopt other methods. This means
companies can also choose other methods such as the transactional profit methods
of the OECD Guidelines (namely, profit split and transactional net margin method)
for the determination of the arm’s-length price, if they can prove that the abovementioned traditional transaction methods cannot be used.
According to the General Communiqué No. 1, the other methods are defined as
the following:
• Profit split method.
• Transactional net margin method.
If none of the aforementioned methods can be applied, the method determined by the
taxpayer may be used as the most appropriate method for the transactions.
Comparable uncontrolled price method
In the comparable uncontrolled price method (CUP), if the internal comparables
are sufficient to reach an arm’s-length price, there is no need to find an external
comparable. If there is no internal comparable, external comparables should be used
after making a comparability analysis and the necessary adjustments.
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Cost plus method
In the cost plus method, all the direct costs, indirect costs, common costs related to
service or product and operation costs should be considered.
If there is a difference between the accounting systems of related and unrelated
transaction processes, the necessary adjustments should be made.
Resale price method
The resale price method evaluates the arm’s-length character of a controlled
transaction by reference to the gross profit margin realised in comparable uncontrolled
transactions, and is most useful where it is applied to marketing operations, such
as distributors.
Profit split method
The profit split method is based on the distribution of the operating profit or loss
among related parties according to their functions performed and risks assumed.
Transactional net margin method
The transaction net margin method (TNMM) is applied according to the net
operating profit margin that is found by considering the costs, sales or any other
appropriate base.
Tax havens
In addition to inter-company transactions between related parties, the transfer pricing
provisions of the CITL cover transactions between unrelated parties, where the foreign
party is located in one of the tax havens to be identified by the Turkish Council of
Ministers. However, such a list has not been published yet as of 30 September 2012.
Payments for services, commissions, interest and royalties to parties located in a
tax haven are subject to a 30% withholding tax under the CITL. However, if the
transactions involve the import of a commodity or the acquisition of participation
shares or dividend payments, the withholding tax is not applicable as long as the
pricing is considered to be arm’s length.
Deemed dividends
When it is determined by tax inspectors that the price applied in a related party
transaction is not at arm’s length, the outcome is a tax adjustment on corporate tax
as well as additional dividend tax on the disguised profit distribution. This requires
that if the counterparty is a non-resident taxpayer, individual or any tax-free person;
corporate dividend tax should be paid over the disguised profit distribution.
Adjustments
Any transfer pricing-related adjustments deemed necessary by the tax inspectors will
be made to the taxpayers’ earnings after they pay their respective corporate taxes.
Disguised profit distributions through transfer pricing are not accepted as deductible
for CIT purposes. The corporate tax base of the taxpayer will be adjusted, and relevant
corporate tax will be calculated together with the penalties and late payment interest.
Besides, the disguised profit which is wholly or partly distributed to a related party will
be treated as:
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• deemed dividend, if the corporation distributing the disguised profit is a
resident taxpayer,
• remittance, if the corporation distributing the disguised profit is a nonresident taxpayer.
In both cases, the amount of disguised profit will be subject to a withholding tax.
However, pursuant to Article 5(1)(a) of the CITL No. 5520, if the related party
receiving the disguised profit is a resident corporate taxpayer, the disguised profit
will be evaluated within the context of ‘participation exemption’. Accordingly, no
withholding tax will be imposed and adjustment will be made on the tax return.
Documentation requirements
The legislation requires documentation as part of the transfer pricing rules wherein
Turkish taxpayers should keep documented evidence within the company in case of
any request by the tax authorities. The documentation must represent how the arm’slength price has been determined and the methodology that has been selected and
applied through the use of any fiscal records and calculations, and charts available at
the taxpayer.
The transfer pricing regulations in Turkey have three basic documentation
requirements:
• Electronic corporate tax return form about transfer pricing, controlled foreign
company and thin capitalisation.
• Annual transfer pricing report.
• Transfer pricing documentation for taxpayers during the application of an APA and
annual report for taxpayers under an APA.
According to General Communiqué No. 1, all corporate taxpayers should submit a
form as an attachment to their annual corporate tax return. The form constitutes the
following parts:
• Information about the taxpayer (tax ID number, corporate name, taxation
period, etc.).
• Information about the related parties within the scope of the form (corporate
name, country of residence).
• Total amount of transactions that occurred between related parties.
• The methods used for the related party transaction.
• Information about the controlled foreign company of the company (corporate
name, country of residence, etc.).
• Information about thin capitalisation.
On the other hand, corporate taxpayers are obliged to prepare an annual transfer
pricing report in line with the format that is stated in the General Communiqué No.
1. An annual transfer pricing report should be prepared until the last day of CIT
declaration day, which is 25 April for taxpayers whose fiscal year is calendar year. The
report shall compose different levels of information depending on:
• whether the taxpayer is registered to the Major Taxpayers Tax Office, and
• whether the taxpayer is operating in free trade zones in Turkey.
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According to the above-mentioned distinction:
• corporate taxpayers that are registered to the Major Taxpayers Tax Office shall
prepare a report that comprises information about both their domestic and crossborder related party transactions, and
• corporate taxpayers that are operating in free trade zones (FTZ) in Turkey shall
prepare a report that comprises information about their transactions with their
related parties in Turkey.
All other Turkish corporate taxpayers shall prepare a report that comprises information
about their cross-border related party transactions.
Documentation deadlines are as follows:
Preparation deadline
Transfer pricing
form
Annual transfer
pricing report
Corporate tax return submission
on the 25th day of the fourth
month following the end of the
fiscal year
Submission deadline
Corporate tax return submission
(as an attachment to the corporate
tax return) on the 25th day of the
fourth month following the end of the
fiscal year
15 days upon request
Disposition of the annual transfer pricing report is mentioned in the related legislation
as follows:
• General information: Information about the field of activity of the taxpayer,
economic conditions in this field, market conditions and business strategies.
• Information about related parties: Information about tax ID numbers, addresses,
telephone numbers, etc. of the related parties and the field of activity of the related
parties as well as economic conditions in this field, market conditions and business
strategies, functions they generate, risks they assumed and assets they owned.
• Information about the details of related party transactions: Detailed information
about all transactions and agreements between related parties.
• Information about transfer pricing analysis: Detailed information about
comparability analysis, criteria that are used to choose for the comparable
transactions (whether there are corrections on determination of the comparability
the detailed information for that; information, documentation and calculation that
shows the applied TP method is the most suitable as well as the comparison of the
applied method to the other methods; detailed information about the calculations
used to find the arm’s-length price or profit margin; whether an arm’s-length price
range is determined, and the detailed information on this range).
• Conclusion: A summary includes the methods and arm’s-length prices of the
intercompany transactions.
Taxpayers that apply for an APA shall prepare application documents, and once an
APA is concluded with the Revenue Administration, the taxpayer shall prepare a
separate annual report that takes transfer pricing into consideration from the APA’s
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point of view. The documents and information required for the annual report of APA is
separately defined in the legislation.
The administration can demand additional information and documents for the annual
transfer pricing report, the APA application and other corporate taxpayers that have
related party transactions when deemed necessary. If the documents are written in a
foreign language, their translation into Turkish is obligatory.
Other documents
Corporate and individual income taxpayers must prepare transfer pricing
documentation. The type of information that is required is outlined in General
Communiqué No. 1 as follows:
• Organisation chart and definition of the company’s activities, definition of related
parties (tax ID numbers, addresses, telephone numbers, etc.) and property
relations amongst them.
• All the information that includes the functions undertaken and the risks assumed
by the company.
• The product price lists in the transaction year.
• The production costs in the transaction year.
• Invoice information and the number/value of transactions made with related or
unrelated parties in the transaction year.
• All the contracts with related parties in the transaction year.
• Financial statements of the related parties.
• Internal pricing policy of the company, which is applied to related
party transactions.
• The associated information if related parties use different accounting standards
and methods.
• Information related to the ownership of intangible property and amounts received
or paid for intangible rights.
• Reason for choosing the transfer pricing method applied and informative
documents related to the application of the transfer pricing method (internal and/
or external comparability analysis).
• Calculations used to determine the arm’s-length price or profit margin and detailed
information related to assumptions.
• Method used to determine the arm’s-length price range, if any.
• Other documents used to determine the arm’s-length price.
Language for documentation
TP documentation should be prepared in Turkish.
Other regulations
In addition to the specific transfer pricing regulations, additional requirements or rules
covering transfer pricing contained in other legislation include:
• Turkish tax procedural law article with regard to the determination of the market
value of goods.
• Turkish value added tax (VAT) law article stating if the tax base for goods and
services is unknown, the market prices based on the nature of the transactions will
be the tax base.
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• Turkish income tax law Article 41 includes partnerships and individuals subject to
income within the scope of transfer pricing.
• Case law on an excessive number of decisions of Turkish tax courts after cases have
been discussed at courts where tax inspectors challenged the transfer prices and
eventually the disguised profit distribution of the taxpayer.
• Case law on tax rulings on the subject.
Legal cases
In recent years, the Turkish Ministry of Finance significantly increased its number
of transfer pricing audits against companies, with a particular emphasis on the
pharmaceutical, automotive and fast moving consumer goods sectors. In the course
of these audits, the Ministry of Finance has focused on the following transfer
pricing issues:
• Pricing of raw materials traded amongst related parties, with the government
relying on industrial benchmarking studies that omit relevant risks and functions.
• Continual losses in previous years by companies that operate primarily through
related companies abroad.
• Management fees and indirect cost allocations.
• Yearend adjustments.
It is expected that the companies will face different levels of tax audits under the
subject of transfer pricing in the coming couple of years as the current rules seem to
become a trendy subject to the tax inspectors.
Burden of proof
In Turkey, the burden of proof lies with the party making the claim under Article
3 of Turkish tax procedural law. Establishing proof includes an examination of the
substance of the business event that gives rise to the transaction.
According to the requirements of the transfer pricing law, companies should be ready
to provide evidence in order to explain why they chose to implement a specific transfer
pricing method. Moreover, responsibility for safe-keeping of the workings/accounts
and sheets for this issue rests with the taxpayers.
In the case of a tax audit, if the tax inspector claims the application of the transfer
pricing method by the company is against the law, then the burden of proof will shift
to the inspector. If a situation is claimed to be clearly lacking in economic, commercial
and logical justification, the plaintiff is liable to prove his claim.
Tax audit procedures
The structure of tax audit institution has changed recently and the taxpayers are
separated into two classes, which are large and small scope taxpayers. The taxpayers
that are registered to the Large Taxpayers Tax Office are always monitoring by the tax
inspectors. Besides a new transfer pricing audit department established, that conducts
only transfer pricing audits.
Revised assessments and the appeals procedure
Assessments are made by the tax inspectors at the end of the tax audit. There is no
administrative appeals procedure, but a special reconciliation with the tax authority is
possible. If parties cannot reconcile at the end of the reconciliation process, then the
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taxpayer is able to go to court. Likewise, the taxpayer can choose not to reconcile prior
to the reconciliation process and go to court.
Additional tax and penalties
There are no specific transfer pricing penalties. The penalty provisions of the tax
procedural law apply to those who do not submit the required documentation and/or
where transactions are found to be inconsistent with the arm’s-length principle. Briefly,
if the profit that is distributed in a disguised manner through transfer pricing shall be
deemed as dividends distributed, then necessary adjustments on taxes will be made
at the hands of the party receiving the deemed dividends. In this respect, the taxes
assessed in the name of the company distributing dividends in a disguised manner
must be finalised and paid.
There is no specific tax loss penalty in Turkish tax legislation for transfer pricing
adjustments. The general tax loss penalty provisions in the Turkish tax procedural
law are applicable. The general tax loss penalty is equal to one fold of the unpaid tax.
Additionally, there is a delay interest applied on a monthly basis (1.4% effective from
19 November 2010) for the period between the normal due date of the additional tax
assessed and the date of assessment. Further, there is no specific reduction provision
for transfer pricing-related tax loss penalty assessments; general rules in the Turkish
tax procedures code are applicable. Taxpayers may appeal to the Ministry of Finance
for a reduction in the tax loss penalty through settlement procedures with the tax
authorities either before or after the imposition of the assessment.
Resources available to the tax authorities
During the tax audits, tax returns of the comparable companies may be used by the tax
authority. Besides there is special audit unit under Turkish Revenue Administration to
deal with transfer pricing issues. Both the local tax inspectors and the transfer pricing
specialist tax auditors pose a high level of industry-specific knowledge, and they may
use a variety of sources for benchmarking such as financial data published by listed
companies as well as data from other taxpayers. The lack of statistical information
for determining the profit margin of specific activities and the lack of local databases
directly affect the accuracy of benchmarking studies.
Moreover, as mentioned in the Documentation requirements section, above, by using the
annual form, inspectors may assess the amount of related party transactions in a year
and initiate an investigation accordingly.
Use and availability of comparable information
As previously mentioned in the Statutory rules section, above, taxpayers may use both
internal and external comparables. However, available local data in Turkey is limited
because only publicly held companies are obliged to declare their financial data.
Turkish transfer pricing legislation neither provides a clear guidance on benchmarking
studies nor prohibits the use of databases.
Therefore, it might be inferred that foreign comparables should be acceptable,
provided that differences in geographic markets (if any) can be eliminated through
appropriate adjustments and/or analyses. Besides, comparable company sets should be
updated on an annual basis according to the most recently available data.
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An important point to be considered for Turkish taxpayers regarding the use of
‘publicly available comparable data’ for the purpose of benchmarking (which is an
OECD principle) is when determining transfer-pricing-related assessments Turkish tax
auditors would highly tend to use their own ‘secret comparables’ to which only they
have access, by virtue of their public authority. Turkish taxpayers are advised to be
ready to challenge this approach, which is contrary to the relevant OECD principles.
Risk transactions or industries
Tax authorities use special software to determine the company they audit. This
software includes all the financial information of the taxpayers and they are selected
with the help of including but not limited to the following criteria: net sales amount,
fluctuation in the profit margin, recent year losses, having loss in the current year,
paying management or license fees to abroad related parties, having related party
transactions with the companies that are based in low tax regime countries etc.
Accordingly the number of transfer pricing audits has been increasing in recent years
and it is expected to continue. Besides, tax authorities request the transfer pricing
reports even if there is no transfer pricing audit. The numbers of the companies that
are requested to submit their transfer pricing report to the tax authorities are increased
dramatically in 2012. Lastly, in many cases transfer pricing audits may trigger VAT and
customs related audits.
Limitation of double taxation and competent authority
proceedings
Turkish tax treaties (currently with 74 jurisdictions) contain relevant mutual
agreement procedure (MAP) articles. Countries that have signed a double tax treaty
with Turkey may, in theory, pursue competent authority relief as a means of preventing
double taxation arising from tax adjustment. However, in practice there are very rare
cases where MAPs are initiated, meaning the MAP has not been tested by Turkish
taxpayers as a means of preventing double taxation.
Advance pricing agreements
Methods to be used in determining the price regarding purchases or sales of goods
or services with related parties may be agreed with the Ministry of Finance upon
taxpayer’s request. This approved method will be certain for a maximum period of
three years within the terms and conditions of the agreement. If the administration
identifies that the demand for the agreement interests more than one country and if
there are already APAs considering the other county/countries, the administration may
consider the possibility of a bilateral or multilateral agreement.
The APA process begins with the written application of the taxpayer after application
fee (38,000 Turkish liras [TRY] for 2012) is paid. The taxpayer submits to the TRA
the requested information and documents with the application. Information and
documents submitted are subjected to a preliminary assessment by the TRA. If the
information and documents do not allow the TRA to make a sufficient assessment, the
TRA may request additional information and documents or meet with the taxpayer.
Following the completion of necessary data, an analysis is made regarding comparable
transactions, assets used, applicable methods, agreement terms and other relevant
aspects. As a result of the analysis, the TRA may accept the taxpayer’s application as it
is or approve it on condition that necessary modifications are made or reject it.
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Nine months prior to the end of the validity of the agreement, a taxpayer may apply for
its renewal.
In view of practices throughout the world, it is observed that APA process changes
according to complexity level and type (unilateral, bilateral or multilateral) of the
agreement and completion of the process cannot be completed earlier than 18 to 24
months in average.
Anticipated developments in law and practice
Regarding the legislations no development has been anticipated in recent years;
however regarding the practice, Turkish Tax Authorities has been focusing on transfer
pricing applications of the taxpayers and this approach is expected to continue in the
following years. In this respect, a new transfer pricing unit that consists of transfer
pricing auditors has been established under the roof of ministry of Finance. In line with
this development both the transfer pricing tax audits and the number of the companies
that are asked to submit their transfer pricing reports increased dramatically in the
last years.
Liaison with customs authorities
The customs rules in Turkey are not specifically coordinated with the transfer pricing
rules. The customs authorities have their own legislative guidance for the treatment
of inter-company transfers of imported/exported material. Additional TP regulations
may create the need to incorporate customs practices into joint legislation. There have
been joint efforts by customs and tax authorities to work on the transactions and to
investigate import prices in specific industries. For example, reports have been written
by a customs inspector that challenged import prices.
OECD issues
Turkey is a member country of the OECD and acknowledges the organisation’s transfer
pricing guidelines. On the other hand, as Turkey’s transfer pricing regulations are
new and at the development stage, they have yet to fully incorporate all the principles
contained under the OECD Guidelines. The current transfer pricing law provides an
impetus for the adoption of improved transfer pricing regulations in accordance with
best international practice.
Thin capitalisation
The thin capitalisation issue is rearranged under Article 12 of the CITL. According to
the Article, if the ratio of the borrowings from shareholders or from persons related to
the shareholders exceeds three times the shareholder’s equity of the borrower company
at any time within the relevant year, the exceeding portion of the borrowing will be
considered as thin capital.
The scope of the term ‘related parties’ consists of shareholders and the persons who
are related with the shareholders that own 10% or more of the shares, voting rights or
right to receive dividends of the company.
The shareholder’s equity of the borrower company is defined as the total amount
of the shareholder’s equity of the corporation at the beginning of the fiscal year, or
the difference between the assets and liabilities of the company. If the company has
negative shareholder’s equity at the beginning of the year, then any borrowings from
related parties will be considered as thin capital.
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If thin capitalisation exists, the interest paid or accrued, foreign exchange losses and
other similar expenses calculated over the loans that are considered as thin capital are
treated as non-deductible for CIT purposes. Moreover, the interest paid or accrued and
similar payments on thin capital will be treated at the end of the relevant fiscal year as
deemed dividends and will be subject to withholding tax.
Management services
Although in the past the law did not provide definitive legislation relating to
management services, the new transfer pricing article takes the OECD Guidelines as
a basis. Through these developments, management services may be subject to greater
scrutiny under the transfer pricing regulations.
As per Turkish transfer pricing regulations, management services refer to one of
the following:
• The services performed by the corporate headquarters to other related
group companies.
• The services rendered by one group company to another.
These services are usually considered as services that ensure intra-group management,
coordination and control functions. The costs of these services are undertaken by the
parent company, a group company that is responsible for this purpose or another group
company (group services centre).
From the perspective of Turkish transfer pricing-regulations, the following points have
to be taken into consideration:
• Whether the service has been actually rendered.
• Whether the receiver company(s) needs the service.
• Whether the price of those services is at arm’s length.
Because of the uncertainty of management services and their prices, management
service fees are always an easy target for the tax audits to attack. The payments that
fail the above-mentioned points may be criticised from a transfer pricing point of view
and may be non-deductible for CIT purposes.
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